East Asia’s Dynamic Development Model and the Republic of Korea’s Experiences

East Asia’s Dynamic Development Model
and the Republic of Korea’s Experiences

Ho-Chul Lee*, and Mary P. McNulty**

World Bank Policy Research Working Paper 2987, March 2003
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the
exchange of ideas about development issues. An objective of the series is to get the findings out quickly,
even if the presentations are less than fully polished. The papers carry the names of the authors and should
be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely
those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors,
or the countries they represent. Policy Research Working Papers are available online at
.
* Economic Adviser, DECVP, The World Bank, on secondment from the Ministry of Finance and
Economy, Republic of Korea.
** Consultant, DECVP, World Bank and George Washington University.


Abstract
No region has been more dynamic in recent years than East Asia. Despite its successful
economic development, evaluations of the East Asian development model have often
been capricious, shifting from ‘miracle’ to ‘cronyism.’ How can we explain East Asia’s
ups and downs consistently? To respond to this challenge, it is necessary to study the
progress of East Asian development and to trace the influence of Asian cultural values.
This study mainly focuses on cultural aspects of economic progress and analyzes East
Asia’s philosophical and historical backgrounds to explain the dynamic process.

East Asians believe that balance between opposite but complementary forces, Yin and
Yang, will ensure social stability and progress. Through repeated re-balancing to
maintain harmony, the society comes to maturity. In traditional East Asian societies, a
balance was maintained between Confucianism (Yang) and Taoism, Buddhism and other

philosophies (Yin). In modern societies, the challenge is to balance traditional systems
(Yang) and Western style capitalism (Yin).

This East Asian development model explains Korea’s rise, fall, and recovery. Korea was
a poor country until the early 1960s, during the time when spiritualism (Yang)
dominated. From the 1960s through the 1980s, Korea achieved rapid growth by finding a
new balance and moving toward materialism (Yin) from spiritualism (Yang). But the
failure to maintain a harmonious balance between cooperatism/collectivism (Yang) and
individualism (Yin) led to major weaknesses in labor and financial markets that
contributed significantly to the financial crisis in 1997. As Korea arrived at a new
balance by instituting reform programs, the venture-oriented ICT industry blossomed and
led a rapid economic recovery. Since 2000, domestic financial scandals and political
corruption have emerged as new social issues. Korea’s next challenge is to find a new
harmonization between moralism (Yang) and legalism (Yin).

2


Contents

I. Introduction

4

II. East Asians’ Living Space

6

East Asian and Western Cultural Spaces

6

The Social Axis

7

The Political Axis

10

The Economic Axis

12

III. Principles of East Asia’s Dynamic Development Pattern

16

Philosophical Foundations

16

East Asian Economic Thinking

22

Basic Conditions for the East Asian Approach

26

IV. Application to the Korean Economy

30

1960s to 1980s: Miracle on the Han River and the Movement from
“Spiritualism” toward “Materialism”

30

1987-1997: Disharmony between “Cooperativism/Collectivism” and
“Individualism” and Prelude to Crisis

37

1999-2000: One More Miracle and the Shift from “Cooperativism/
Collectivism” toward “Individualism”

42

Remaining Issues after 2000: Shift from “Moralism” toward “Legalism” 45

V. Conclusions

50

References

53

Annexes

56

3


I. Introduction

No region has been more dynamic than East Asia in recent times. Since the 1960s, a
pattern of rapid growth and integration into the world economy has occurred in this
region, particularly in Japan, the four Newly Industrializing Economies (NIEs) of South
Korea1 , Singapore, Taiwan-China, and Hong Kong, and most recently China. Of course
these economies did not experience unmitiga ted success. They also experienced the dark
side of prosperity and some misfortunes, such as the economic sluggishness in China
until the 1970s, the prolonged Japanese recession of the 1990s, and the financial crises in
1997. Undeniably, the East Asian economies exhibit dramatic vitality in both the upside
and downside of growth and development.

In particular, the progress of the Korean economy has been very impressive. Korea, a
country of 47 million people living in a small area no larger than the state of Indiana in
the U.S., has achieved an impressive record of growth. Korea’s per capita income grew
100-fold in four decades. Korea, which had less than $100 in per capita income in the
early 1960s, grew to become an industrial giant and joined the OECD in 1995.

Despite the relatively successful economic development efforts in East Asia in the second
half of the 20th century, evaluations of the East Asian model have been mixed. After the
World Bank published The East Asian Miracle in 1993, many economists looked for the
main factors driving East Asia’s rapid growth with highly equal income distribution.
Following the 1997 crises, though, most studies focused on the negative points,
emphasizing over-regulation, inadequate competition, and capital market rigidities that

could stifle growth (Wade 1998, Dore 1998, Overholt 1997).

At times East Asian development has gone smoothly and at other times the economies
have experienced great difficulties. Particularly in the early stages of development, the
East Asian approach showed great promise as the economies in the region grew rapidly
and the living standards of their people improved. Many countries stumbled badly,
1

In this paper, Korea refers to the Republic of Korea (South Korea).

4


however. The merits and vulnerabilities of the East Asian models must be analyzed and
reconciled if the East Asian approach, once extolled as the most successful model for
poverty reduction, is to remain relevant for successful development.

The aim of this study is to present a coherent model of East Asia’s development that
explains the dynamics of the pattern of development, the “downs” as well as the “ups.”
A holistic approach to development is needed to investigate the issues that form the
foundation and context of the model. In reality, economic growth is influenced by
economic, institutional, and cultural factors. It is widely acknowledged that
accumulations of capital, labor, and technology are crucial factors in economic growth.
The institutional approach emphasizes the additional need for well-organized product,
labor, and financial markets to manage these resources efficiently and a suitable legal
framework that includes such protections as property rights to encourage technological
progress. Cultural aspects also stimulate human progress and economic development. 2
Without doubt, all three sets of factors contribute to economic development. This study
mainly explores cultural aspects of development to complement the main stream of
research that has generally focused on economic and institutional factors.

This paper examines the philosophical and historical backgrounds that shape the East
Asian model and examines how the model has coped with new challenges and changing
conditions. The paper consists of two parts. The first part (Sections II and III)
investigates the origins of East Asian cultural characteristics. Philosophical backgrounds
such as Confucianism and Taoism are explored briefly, and principles of East Asia’s
pattern of dynamic development are analyzed. The second part (Section IV) explores
Korea’s economic development, the ups and downs, within the context of the East Asian
model. The analysis focuses on changes in Korean attitudes and institutions as the
country faces new challenges.

2

The World Bank organized a conference on the interrelationships of culture and development process in
July 2002. Findings are forthcoming as a book, Culture and Public Action, by Vijayendra Rao and Michael
Walton.

5


II. East Asians’ Living Space

Friedman and Friedman (1980) said human life is made up of individual choices and the
freedom to choose without external interference will contribute to human welfare.
Without doubt, this approach has become increasingly accepted in recent years. In
reality, though, humans are never totally free from social restrictions because, as Aristotle
observed, human beings are “social animals.” To consider individuals’ lives and
economic decisions more realistically, the social and political factors as well as economic
factors that influence individual choices must be considered. These factors collectively
define the “cultural space” within which individuals live and make choices. East Asian

and Western cultures have developed differently through history, and so the cultural
space of their people differs.

East Asian and Western Cultural Spaces
Throughout the history of human civilization, regions have developed different cultural
values, ways of thinking, and norms of behavior. Taken together, these influences form a
“cultural space” within which people live. East Asian societies were influenced primarily
by Confucianism, Taoism, and Buddhism, and their languages are based on Chinese
characters. East Asians have lived in a very different cultural space than Europeans and
Americans whose culture was profoundly influenced by Christianity and share a
different, non-Chinese alphabet. To explore the differences among cultures, cultural
space can be described by three axes:3 social (X), political (Y), and economic (Z) (see
Figure 1).

On the social axis (X), Ea st Asian societies tend to stress families, cooperative values,
and a modest demeanor, while Western societies are associated with individualism and a
more forward demeanor. On the political axis (Y), Western societies have developed
social order based on legal systems. In contrast, East Asian societies believe that rule by
moral principles is better than rule by legal principles. On the economic axis (Z), East

3

Of course, a more complete cultural space would be described by a variety of axes (including e.g.
medicine); however, this construction of three axes is most relevant for this discussion.

6


Asian societies tend to stress spiritual values and downplay material possessions, while
Western economic thought tends to focus on material things – production and

consumption. Of course, within any country there is a range of individuals, and within
Western and Eastern societies there is a range of national averages. Generally, though,
East Asian societies would be represented by points on the southwest section of each
axis, while Western societies would be represented by points on the northeast section of
the axes. Over time and with the acceleration of international integration, the placement
of cultures along the axes has moved, seemingly progressing toward a convergence in
various aspects.

Figure 1 The East Asian and Western Cultural Spaces

Y axis: Political
Legalism

West

Materialism

X axis: Social
Individualism

Cooperativism/
Collectivism
Z axis: Economic
Spiritualism
East Asia

Moralism

The Social Axis
Sociologists and anthropologists have traditionally approached the analysis of cultures by

examining the dichotomy between individualism and cooperativism/collectivism.
Collectivist societies put relatively more value on group memberships and common goals

7


rather than individual concerns and self- interest (Earley and Gibson, 1998). This study
adopts the concept of “cooperativism/collectivism” to reflect East Asians’ respect for
individuals’ prestige and value but emphasis on cooperative relationships rather than
competition to maintain social harmony. In contrast, Perry (2000) proposed a profile of
the U.S.’s cultural values that includes individualism, openness, and equality/fairness and
then compared that profile with other societies’ values of group orientation, hierarchy,
“saving face” etc. (see Table 1). 4

Table 1 Comparison of U.S. and Other Societies’ Values
America’s Cultural Values
Other Societies’ Cultural Values
(1) Individualism
(1) Group Orientation
(2) Equality/ Fairness
(2) Rank/ Status & Hierarchy
(3) Directness/ Openness/ Bluntness
(3) Indirectness/ Saving “Face”
(4) Oriented toward the Future
(4) Past Orientation
(5) Control over the Environment
(5) Acceptance of Fate
(6) Change as Natural & Positive
(6) Stability, Continuity & Tradition
(7) Control over Time

(7) Human Relationships/ Harmony
(8) Informality
(8) Formality/ Protocol/ Ritual
(9) Self- help/ Personal Improvement
(9) Birthright Inheritance
(10) Competition
(10) Cooperation
(11) “Doing” Orientation & Achievements (11) “Being” Orientation
(12) Practicality/ Efficiency/ “Bottom Line” (12) Philosophical Considerations
(13) Materialism
(13) Spiritual Considerations
Source: Perry (2000)

East Asian societies are cooperativism/collectivist in that they tend to stress human
interrelationships compared with the West that tends to stress individualism and the
importance of professionalism. The traditional Eastern philosophies of Confucianism,
Buddhism, and Taoism have influenced the formation of East Asia’s cultural values and
its management style. These might be summarized as social attitudes of educational
enthusiasm and obedience, economic behaviors of thrift and diligence, and an economic
framework of long-term investment and lifetime employment built on a seniority system.

4

Perry proposed that the American profile evolved through historical events: the Protestant Reformation of
the 16th and 17th centuries, the Enlightenment of the 18th century, the Industrial Revolution of the 18th and

8


Familism based on human relationships is a pillar of the East Asian collectivist nature.

Familism reflects the clear hierarchical order and system of social obligations based on
Confucianism’s five relationships: parents and children, ruler and subjects, husband and
wife, older sibling and younger sibling, and friend and friend. Confucianism taught that
these relationships formed the social order, and clear obligations and responsibilities
contributed to harmonizing society. For example, young people should respect older
people and obey them; at the same time, however, older people were expected to care for
the young. Confucianism teaches that if people perform their roles in these relationships,
society will be better and peaceful. 5

Confucianism emphasizes benevo lence (“ren”), as a basic moral principle, and etiquette
(“li”) as a method to keep social order. Confucianism holds that human nature is
inherently good and that people have four virtues -- benevolence, justice, ritual, and
wisdom -- which originate from four innate senses -- compassion, shame, concession, and
the capacity to discriminate right and wrong, respectively (Mencius). Confucianism
emphasizes the role of education, because its most important purpose is to prevent man’s
inherent good nature from being affected by the environment. East Asian attitudes such
as modesty and saving face have been developed as aspects of the system of etiquette to
maintain social order and protect people ’s four virtues.

Another pillar of the East Asian tradition is egalitarianism. In particular, Buddhism and
Taoism contributed to the formation of egalitarian attitudes. Buddhism originated in
India during the period of the Brahmans’ caste system of strict class distinctions.
Siddhartha, the founder of Buddhism, emphasized that each person is noble and valuable
regardless of race, class, and gender and that all people -- whatever their origins, noble or
humble -- can become a Buddha, the nearest level to god, if they follow his
enlightenment. These ideas exerted profound influence on East Asia’s egalitarian
tradition. Egalitarianism can also be found in Taoism, a way of behavior that stresses the

19th centuries, the westward movement of the 17th through 19th centuries, and the new values of
Relativism, Multiculturalism and Tolerance in the 20th century.

5
These relationships were described in Mencius and subsequently incorporated into the scriptures of
Confucianism by Zhu Xi (1130-1200) who included them as the five moral doctrines (“Wulun”).

9


importance of following the laws of nature. It teaches that essential nature is close to
equality, and man should tone down his individualism in order to better harmonize with
nature (and society). The egalitarian sprit of Buddhism and Taoism still lives in East
Asians’ minds, whatever religion they formally practice.

The Political Axis
East Asians historically have based their societies on moralism rather than legalism.
Western societies, however, have traditionally been based on legalism, even as far back
as the Hammurabic and Mosaic Codes and the extensive judicial system of the Roman
Empire that was organized into Justinian Code. This fundamental distinction,
compounded by the differing philosophical traditions and therefore moral priorities, can
lead to unease and misunderstanding of the East Asian system by Westerners. For
examples, Wolferen (1989) criticized the Japanese system as operating under
heterogeneous rules, and The Economist (April 5, 2001) described China as having
always been under the rule of man, far from the rule of law. During the 1997 financial
crisis, Korea was severely criticized for its lack of legal framework, along with cronyism
and a lack of transparency.

Early in its history, China experimented with systems based on legalism as well as
moralism. The rise and fall of the first emperor of the Qin Dynasty (221-206 B.C.) and
the lessons learned from the experience contributed to the tradition of placing priority on
moralism rather than legalism. In 221 B.C. the small state of Qin (or Ch’in) first unified
all of China. That is why “China” drew its name from the Qin Dynasty. The Qin

Dynasty succeeded in building a unified, powerful nation based on the principles of a
group of Legalist thinkers. The first Emperor of the Qin Dynasty abandoned cronyism,
aggressively attracted talented people beyond his home state and family, and established
a system of rules based on laws.

The prominent Legalist philosopher Han Fei Zi insisted that a ruler needed three factors
to protect his throne and ensure the nation’s sustainable growth: power and position
(“shi”), management skill (“shu”), and law (“fa”). Han insisted that public power came

10


from the position rather than moral authority. He criticized the Confucian assertion that
the authority of a ruler originated from the ruler’s virtue and wisdom as too idealistic.
For Han, it was more realistic to assume that people would follow a ruler because he has
political power whether he is sage or not. To protect his position, a ruler needs to
manage the bureaucracy effectively and so must have administrative skill. Han advised
rulers to use incentive systems consisting of rewards and punishments. He also
recommended that the performance criteria and responsibilities of a position be clearly
defined when posts are assigned. Anyone who achieves the goals should be rewarded by
the ruler, and anyone who is derelict of duty or oversteps his power should be punished.
The rewards and punishments should be established and executed by clearly defined
laws. If authority is wielded whimsically and without transparent codes, people will not
obey and the ruler will not maintain his position. The ruler has to show people that
incentives will be fairly executed by laws and not depend on arbitrary judgment.

Two legalists, Shang Yang and Li Si worked to implement Legalist ideas in building a
nation. To establish a unified legal system, many regulations were adopted and a policy
of standardization was adopted to promote efficiency. A uniform writing system was
created. The currency and the measurements of length and weight were standardized to

stimulate economic activity and trade. Even the widths of vehicles and highways were
standardized to promote efficient transportation. Reform plans to promote an open
society were adopted to break down the feudal system based on family lines and regional
loyalties. The legalist government boldly encouraged immigration from other states by
granting un- used land to foreigners who wanted to cultivate it and promote agriculture. It
also opened high offices to talented persons beyond the Qin state. One example was the
nomination of Li Si, a foreigner, as prime minister.

The Legalists’ ideas started from a basic assumption that human nature is inherently
selfish, in contrast to the Confucianist assumption that human nature is inherently good.
The Legalists believed that the political system should be designed in response to the
realities of human behavior. They tried to create political institutions that depended on
rule by predictable laws, where a transparent system of rewards and punishments

11


effectively guided people’s conduct and prevented officials from abusing their power.
They thought that objectively described legal codes with transparent criteria would be
preferable to subjective and idealistic moral principles.

Although the Qin Dynasty is considered a pioneering effort in establishing efficient
administration and economic structures, it was overthrown after only 15 years. The
legalist government went too far and lost support. Convinced of the superiority of his
approach, Emperor Qin suppressed opposing ideas and denied other values. He
prohibited any opposition, burned all Confucian books 6 , and then killed hundreds of
dissenting scholars. By focusing exclusively on objective results, the Legalists failed to
acknowledge the role of moral principles in a society. No social system can cover all
aspects of human behavior with only legal codes. Qin’s laws lacked sufficient flexibility
to accommodate changing circumstances or the plight of individuals in unavoidable

circumstances. The many regulations and harsh punishments, along with radical and
sometimes impetuous reforms, generated much opposition among the population -- from
scholars to common people. When the Emperor died while traveling, the system
collapsed, and China turned to another approach.

The Han Dynasty (206 B.C.-220 A.D.), which followed the Qin Dynasty, rejected
Legalism and adopted Confucianism as its basic philosophy. For the two millennia since
then, the Confucian idea of rule by moral principles has been the dominant social
principle. Due to the historical experience with the Qin Dynasty, East Asians widely
think that rule by moral principles is better than that by legal principles.

The Economic Axis
Comparisons of economic systems often rely on binary categories such as capitalism
versus communism, or free market states versus welfare states. A comparison of degrees
of “Materialism” and “Spiritualism” might be more useful to understand the differences
in cultural backgrounds reflected in Western and East Asian economic systems. On the

12


economic axis, East Asian societies traditionally stressed spiritual values over material
possessions, whereas Western economics puts more emphasis on material matters -production and consumption. Here, spiritualism means anti- materialism, not religious
spiritualism which deals with life beyond death. According to Western economic theory,
individuals and households seek to maximize utility. The most efficient production and
pricing of goods and services are main issues in business, and households’ “utility” is
usually gauged with easily quantifiable measures such as spending on goods and services
or household wealth. At the other end of the axis, East Asians traditionally strive to
maximize their happiness within their Confucianism-based culture that stresses
spiritualism over material matters -- once a person has sufficient wealth to satisfy basic
needs, happiness relies on spiritual matters such as intellectual activities and human

relationships.

Early Confucian scholars worried that the unfettered pursuit of self- interest would
destroy social harmony, and social harmony among humans is a priority of Confucian
philosophy. Observation of human behavior, including conflicts among nations and
individuals, suggested that limitless self- interest was not desirable within the social
structure they envisioned. Nations raided other countries in search of “bounty,” and
individuals sometimes deceived others or drove themselves and others to bankruptcy to
satisfy self- interested goals. Mencius warned, “If all from the top to bottom struggle
against each other for profit, the country will be in chaos” (Mencius, chapter I). In short,
early scholars felt that large gaps between “haves” and “have-nots” could damage the ties
that hold society together.

Based on this insight, Confucianism intentionally put a low value on profit-seeking
activities and encouraged people to devote themselves to social justice. Confucius
compared two types of persons: an ideal person (“superior person”) and a humble person
(“inferior person”). Most of Confucius’ teachings were aimed at leading people to be

6

The event happened in 213 B.C. Practical books on medicine, divination, agriculture, and forestry were
exempt from destruction, however, and one copy of each, kept in the Imperial Library, was saved. The ban
on books was lifted in 191 B.C., after the Qin was replaced by the Han Dynasty.

13


superior persons. He taught, “The superior person is aware of justice, the inferior person
is aware of profit” (Analects, chapter IV-16).

The Confucian job hierarchy reflects this anti- materialist stance. In traditional East Asian
society, Confucianism ranked government and education higher than agriculture. Crafts
followed agriculture, and at the bottom of the scale was commerce. In the Chosun
Dynasty (1392-1910 A.D.), the job hierarchy was linked to hereditary social strata.

Figure 2 Confucian Job Hierarchy
Government Officials / Scholars
Farmers
Manufacturers
Merchants

Why did Confucianism disdain economic activities? Confucius did not deny that people
want to be better-off. To the contrary, he acknowledged that it is an instinctive human
desire to live luxuriously with nice clothing and delicious foods in a large house.
However, he taught the importance of making money in the right manner, saying,
“Wealth and honor are what all persons desire, but unless they are acquired in the right
way, no one should take them” (Analects, chapter IV-5).

Concentrations of wealth were a cause for concern because of fears that economic power
could control all values and that wealth could buy everything, even social prestige and
political authority. Confucianism tried to constrain merchants and commercial power by
balancing the power of wealth with social prestige while maintaining the balance between
social justice and economic prosperity. In order to hold economic power in check, it
established a social hierarchy such that people would show respect for those who devoted

14


themselves to social justice rather than economic wealth by conferring greater prestige on
scholars and government officers than on manufacturers and merchants.

Historically land, the basic input of an agricultural society, and wealth had become
concentrated under the control of a few rich persons. A well-known cautionary tale is
that of a rich merchant, Lu Bu-Wei (unknown-235 B.C.). Lu became acquainted with a
royal family and used his wealth to ingratiate himself with the family and advance his
own interests. Lu used his wealth to support Zhung Xing, a member of the royal family
who had not originally been designated as successor to the throne. Lu supported him
financially to build strong relationships and maneuvered to win favors with luxurious
presents. Zhung Xing eventually ascended to the throne and nominated Lu as prime
minister. Lu managed to accumulate not only wealth but also political power, daring to
challenge royal authority and influence the successor to the throne. 7 Confucian scholars
frequently cited this historical case as an example of the arbitrariness and dangers of
economic power. Over time, this ideological bias led many East Asians to look down on
profit-seeking activities. In modern society, the class system and job hierarchy have
disappeared, but the prejudice regarding jobs endured for a long time. It is no wonder
that talented young persons were reluctant to enter the business world until the last few
years.

Worldwide, diverse patterns of life and thinking have developed in different regions. The
characteristics of East Asia’s cultural space can be summarized by
cooperativism/collectivism, moralism, and spiritualism, compared with the West’s
individualism, legalism, and materialism. Analysis of the historical and philosophical
basis of East Asia’s culture provides insights into the principles of East Asian
development.

7

Lu’s support even extended to relinquishing his concubine to the king. According to rumor, the
concubine was pregnant and so Prince Cheng, a future emperor of the Qin Dynasty, was actual Lu’s son.

15


III. Principles of East Asia’s Dynamic Development Pattern

East Asian societies have evolved over more than 2 millennia, taking different roads to
progress. That is why East Asia is sometimes described as heterogeneous. What are the
principles of East Asia’s pattern of dynamic development? In the West, the principles of
markets, private property, competition, and democracy have prevailed and now dominate
social momentum. But East Asia’s traditional approach has been different. Many
scholars assert that Confucianism has shaped East Asia’s way of life, which is true.
However, the region’s history and development is more complex and reflects a variety of
influences. Confucianism alone is not sufficient to explain East Asia, and a deeper
exploration of the region’s history and philosophies is important to understanding East
Asia and differences from the western way of thinking.

Philosophical Foundations
I Ching (or Yi Jing), The Book of Changes, describes the principles of the universe using
64 hexagrams based on the theory of Yin- Yang and Five Elements. To some, this book is
considered an inspired textbook, as if dictated by mysterious oracles. The I Ching is one
of the key books of classic Confucianism as well as a main theoretical part of Taoism.
The Yin- Yang school of thought was a separate philosophy, along with Confucianism
and Taoism, during the Spring and Autumn period (722-481 BC). 8 Despite their rivalry,
both Confucianists and Taoists accepted the Yin-Yang theory, perhaps because the YinYang theory provides a theoretical tool to explain universal laws. Therefore, any
exploration of the East Asian approach needs to start from I Ching.

Balance of Yin and Yang
East Asians have believed that the basic unit of universe consists of two opposite aspects,
Yin and Yang, literally meaning “shaded” and “sunny” respectively, and that their
movement can explain all universal principles. Yin and Yang have usually been

8

The Hundred Schools of Thought grew up during the Spring and Autumn Period (722-481 BC.). Si-Ma
Qian (145-86 BC), a famous ancient historian, identified six major schools -- Yin-Yang School, School of
Names, Mohism, Legalist School, Taoism, and Confucianism -- among hundreds of schools of philosophy
in the his comprehensive history of China.

16


categorized by their characteristics and functions in order to understand the patterns of
nature and conditions of human life. Yin represents earth, fe male, and night, while Yang
indicates heaven, male, and day. Anything cold, dark, moist, and heavy is Yin, whereas
anything warm, bright, dry, and light is Yang. The quiescent and inwardly directed are
Yin, whereas the hyperactive and outward directed are Yang (see Table 2).

Table 2 General Characteristics of Yin and Yang
Yin

Yang

Earth
Female
Night
Dark
Cold
Moist
Heavy
Fall and Winter

Receptive
Inward

Heaven
Male
Day
Bright
Warm
Dry
Light
Spring and Summer
Active
Outward

The notion of Yin and Yang has some important properties. First, it is a pair which are
opposite and interdependent. Yin and Yang compete against each other but are
complementary at the same time. Therefore, Yin cannot exist without Yang, nor Yang
without Yin. They are symbolized by two opposite parts, often black and white or red
and blue. Sometimes Yin is thought to include unfavorable aspects, like moist and dark,
but its existence is important. For example, day and night correspond to Yang and Yin
respectively, and a creature cannot live without night, even if it would prefer to enjoy
only day.

Second, it is a dynamic concept, not stationary. Yin and Yang constantly change. As
night fades, the day dawns, and as the day ends, the night begins. Similarly, Yin
becomes Yang and Yang becomes Yin. They are represented by a moving circle with the
shape of a whirlpool, divided into two sections.

17

Third, it is a relative concept, not an absolute one, because Yin and Yang are evolving
continuously. To emphasize the possibility of change and even reversal, a small piece of
Yin is considered to be within Yang, and small piece of Yang within Yin. For example,
even in the depths of a cold winter, seeds lay waiting to sprout in the spring, just as Yang
waits within Yin for its turn. But most natures do not change in the short-term, and
scholars defined things as Yin or Yang for convenience.

Fourth, the balance between Yin and Yang is very important. For example, traditional
East Asian doctors believe that sickness results from an imbalance between Yin and
Yang. They determine which part is insufficient and supplement it. Society achieves
balance with checks and balances to prevent any group or power from dominating. The
balance between Yin and Yang should be achieved by harmonization between the two
forces rather than by conflict. This approach is in contrast to the Western tradition of
competition based on Hegel’s Dialectic Progress in which a concept gives rise to its
opposite, and as a result of this conflict a third view, the synthesis, arises.

The Yin- Yang theory can be applied to a variety of fields. One example is medicine.
Although each organ has elements of both Yin and Yang, East Asia’s traditional
medicine classifies organs of the body as Yin or Yang according to their predominant
properties. Organs that are filled up and function to secrete something useful (such as the
heart, liver, spleen, lung, and kidney) are Yin. Organs that are empty and function to
absorb something useful from outside (such as the small intestine, large intestine,
stomach, gall-bladder, urinary bladder, and sanjiao 9 ) are Yang. The symptoms of
sickness also can be classified: chill and a slow pulse are symptoms of Yin, while fever
and a fast pulse are symptoms of Yang.

The Five Elements
The theory of Five Elements (“Wu Xing”) subdivides Yin and Yang into five categories
of Metal, Water, Wood, Fire, and Earth in order to analyze universal laws in greater

9

The sanjiao is an unrecognized organ in the Western medicine. It consists of three parts and functions to
govern the invisible energy flow.

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detail. The theory includes three important aspects. First, it provides a tool for grouping
objects or phenomena by their characteristics. The theory does not mean to suggest that
the universe consists of only five elements, but the ancient East Asians found it useful to
focus on five categories to investigate the correspondence and cycle of things or
phenomena. They used the metaphors of nature to describe abstract and intangible
universal laws, including individuals’ fortunes. The image of each element intuitively
suggests its characteristic properties. For example, summer, hot, south, red, and pleasure
have a character of fire, whereas winter, cold, north, black, and fear have a character of
water (see Table 3).

Table 3 Five Elements
Season
Weather
Direction
Color
Feeling

Wood
Spring
Windy
East

Green
Angry

Fire
Summer
Hot
South
Red
Pleasure

Earth
Late Summer
Humidity
Center
Yellow
Sexual

Metal
Autumn
Dry
West
White
Melancholy

Water
Winter
Cold
North
Black
Fear

A second function of the Five Elements is to provide insight into the interactions of
objects and phenomena. The elements describe two relationships: productive and
destructive. The productive relations, which positively contribute to each other’s growth,
can be found between wood and fire, fire and earth, earth and metal, and metal and water.
Wood burns and produces fire. Fire leaves ashes that build the earth. Earth condenses
down into metal. Metal liquefies into flowing liquid water. Water flows into wood to
nourish it. Destructive relationships, which negatively disturb each other’s development,
can happen between wood and metal, wood and earth, fire and metal, fire and water, and
earth and water. Wood devastates the earth by taking its nutrients. Fire destroys metal
by melting it. Earth disturbs water by blocking its flow. Metal destroys wood by cutting
it down, and Water hurts fire by putting out it. In a traditional Five Elements diagram,
the productive relations are next to each other, in the outer ring, and the destructive
relationships are across from each other, in the inner pentagram (see Figure 3).

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Figure 3 Productive and Destructives Relations
Productive Relations

Destructive Relations

Fire

Fire

Wood

Earth

Water

Earth

Wood

Water

Metal

Metal

Third, the Five Elements present an orderly cycle of changes. Wood, fire, earth, metal
and water incessantly rotate like the cycle of the four seasons. Wood, like spring,
symbolizes growth. Nature awakens from the stagnation of winter and begins its activity.
Fire represents summer, the peak time of growth. Flowers bloom and the trees are
covered with thick leaves. Earth corresponds to late summer. Although the energy flow
has already changed, people do not notice the change and stay in an illusion of summer.
Metal represents autumn when nature halts additional growth and concentrates on
ripening and the harvest. Water stands for the cold and stagnant season of winter, when
all growth stops and nature prepares for the next stage and relies on stored potential. The
theory of the Five Elements shows that all is changing and follows a cycle through five
phases.

The Eight Trigrams and 64 Hexagrams
I Ching tried to interpret complicated, real- life human processes starting from the
simplest Yin-Yang dichotomy. In its Appendix, I Ching states, “In the Changes there is
the Supreme Ultimate (“Tai Ji”), which produced the two Forms (Yin and Yang). These
Two Forms produced the Eight Trigrams (“Ba Gua”). The Eight Trigrams serve to

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determine good and bad fortune (for human affairs), and from this good and bad fortune
spring the great activities (of human life).”

The I Ching interprets 64 Hexagrams with abstract and condensed metaphors. The 64
Hexagrams, variations on eight primary trigrams, are a further classification of the YinYang and Five Elements theories. Each Trigram consists of three lines; each line can be
either straight or broken. A straight line stands for Yang, and a broken line stands for
Yin. Eight Yin- Yang combinations result from the trigrams, symbolizing each of the
eight natural elements -- heaven, lake, fire, thunder, wind, water, mountain, and earth.
The ancient East Asians combined the trigrams with a variety of images such as animals,
members of the family, numbers, parts of the body, compass directions, seasons of the
years, etc. (see Table 4). The 64 Hexagrams come from combinations of two trigram
arrangements.

Table 4 The Eight Trigrams
Image
Heaven

Structure
Awareness

Character
Creative, Strength,
Force
Pleasure, Serene

Essence

Yang
Willing
Yin Feeling

Lake

Feel

Fire

Think

Cling together,
Radiance, Attaching
Exciting, Shaking

Yin
Thinking
Yang
Sensing
Yin Sensing

Thunder

Spirit

Wind

Sense

Water

Soul

Mountain

Body

Soft, Gentleness,
Nourishing
Danger, Courage,
Abyss
Stillness

Earth

Will

Receptive

Yang
Thinking
Yang
Feeling
Yin Willing

Family
Father
Youngest
daughter

Middle
daughter
Eldest
son
Eldest
daughter
Middle
son
Youngest
son
Mother

The Trigrams and Hexagrams are essentially representations of processes that occur in
human life and nature. By combining symbols that reflect dynamic elements in nature
and the human process, the ancient East Asians sought to understand and predict patterns,
cycles, and polarities in nature and human development. Applying these symbols to

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individual development and studying the relationships of the trigrams in the se
configurations is thought to provide insights into past and future events. Interpretation of
the trigram arrangements and consideration of the natural development process can allow
man to adapt and fit smoothly into the patterns of nature and seek bala nce within cycles
of growth.
Figure 4 Image of the Universe - Yin and Yang Surrounded by Eight Trigrams 10

East Asian Economic Thinking
East Asians have applied the Yin-Yang and Five Elements theories to a variety of areas.
East Asian medicine includes traditional therapies such as herbal medicine, acupuncture,

moxibusion, and therapeutic massage. Although such alternative medicine does not meet
the scientific demands of modern biomedicine, it can help improve human health by
complementing conventional treatments.

Characteristics of the East Asian Approach
Similarly, East Asians’ economic thinking has characteristics that can complement
orthodox economics. First, the East Asians developed a human-oriented approach. The
mainstream orthodox economics that originated in England mainly considers issues of the
price and quantity of goods. It is essentially a materialistic approach that seeks a solution
that maximizes utility under the limitation of resources, stressing economic efficiency
10

Korea’s flag contains a version of this image, symbolizing the Universe that originated from the ideas of
I Ching. The Mongolian flag also has a symbol of yin and yang.

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and productivity. Measurable variables are preferred for analysis in order to provide a
clear, logical solution. The East Asian approach, however, focuses on individuals’
choices to maximize their happiness. People face difficult decisions every moment in
their lives -- whom to marry, where to live, and where to work. Orthodox economics
generally limits itself to economic life – how much to produce, what price to charge,
where to invest, which stock to buy, when to buy and sell, and so on. Most personal
choices are largely out of the scope of orthodox economics, because its knowledge,
primarily information on costs and benefits, contributes only partially to individuals’
actual choices. In actuality, people consider a wide range factors in their decisionmaking, including their own personality and the reactions of others, in addition to the
pecuniary aspects of the decision.

Second, the East Asian approach incorporates explicit consideration of groupings of

human natures, personal attitudes, and behaviors. Decisions depend considerably on
individuals’ personalities. Some traits are inherited from parents, and some are formed
later through education. Every person has his/her own personality, and the best decision
to insure maximum happiness will differ with the person. Although lawyers and medical

Table 5 The Five Elements
Five Elements
Wood

Behavior Patterns
Creative, hard working, decisive, and directing. Likes to be in
control and to keep busy.

Fire

Emotional, communicative, and articulate. Tends to be very
sociable, loving, and can be quite spiritual in outlook.

Earth

Sympathetic, considerate, and supportive. Tends to be an “Earth
Mother” type, with focus on caring for others.

Metal

Well-organized, neat, methodical, and meticulous. Tends to be very
self-contained and does not express emotion much.

Water

Flexible, well- motivated, ambitious. Can also tend to be lazy and
“go with the flow” too much.

Source: Liechti (1998)

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doctors generally enjoy considerable wealth, a person should not enter those fields if they
are not compatible with his/her personality. If the person is not in harmony with the
field, he/she will not succeed or find satisfaction. Similarly, even if investments in
venture capital tend to have high yields, they are not the best choice for persons who are
not comfortable with that level of risk.

Third, East Asians follow a relative approach to economic decisions, changing according
to the other party. When starting a business, one important decision is whom to deal with
and whom to take as partners. For this purpose the Five Elements theory categorizes
humans natures and analyzes their relationships. If one person’s personality or the
business’s prosperity is close to the nature of wood, partners with the natures of fire or
water wo uld be easy to work with while the possibility of troubles increases in
relationships with those with the nature of earth or metal.

Fourth, the East Asian way of thinking emphasizes a dynamic approach. Actual
situations change every moment. People’s perceptions are dynamic, not static. When
East Asians make important decisions, they try to trace patterns of change and consider
that all conditions are frequently changing as time passes. The Five Elements theory
applies in these circumstances as well. For example, parents consider the future job
market when their children choose their specialty. Just one generation ago, coal and steel
sectors were leading industries with good jobs and high wages, but now they are
declining industries. Forecasting the future is not easy, but it is very important when

making current decisions. Using the Five Elements theory, if it is determined that the
present is in the wood stage, it is easy to predict that the next stages will be consecutively
fire, earth and so on.

Application to Economics and Business
The Yin- Yang theory can be applied to basic supply and demand theory. The supply
curve corresponds to Yang and the demand curve corresponds to Yin, because the supply
curve has a positive relationship with price while demand has a negative relationship.
The point where the supply and demand curves cross defines an equilibrium, like the

24


balance between Yin and Yang. There is a difference from orthodox economics in that
Yin-Yang theorists think of supply and demand as dynamic and consider the possibility
that their natures might change. That is, although supply curve generally slopes upward
from left to right, over time the curve could be reversed. In the stock market, investor
behaviors change frequently over time; if Yang dominates it leads to a bullish market
while Yin leads to a bearish market. The Five Elements theory can also be applied to
personnel characteristics, job priorities, and job references. Human behavior patterns are
related to job success and so the company’s prosperity.

Economists have found that a functioning economy exhibits cyclical movement.
Business cycle theory explains this phenomenon as a repeating pattern of four phases -expansion, peak, recession, and trough. An expansion is characterized by positive GDP
growth and lasts until the peak is reached and GDP growth declines. A recession is
period of negative growth as the economy drops from the peak down to the trough and
another four-phase cycle begins again. The cycle of the Five Elements coincides with the
business cycle. The only difference between the East Asian approach and orthodox
economic analysis is an additional stage, a bubble, between expansion and recession. In

Figure 5 Four-phase Business Cycle and Five Element Cyc le

Bubble
(Earth)

Peak
(Fire)

Expansion
(Wood)

Recession
(Metal)

Trough
(Water)

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